|
Forms of Business
Forms of Business
The most common forms of business are the sole proprietorship,
partnership, and corporation. When beginning a business, you
must decide which form of business to use. Legal and tax
considerations enter into this decision. Only tax
considerations are discussed in this article.
Tip
Your form of business determines which income tax return form
you have to file.
Sole proprietorships. A sole proprietorship is an
unincorporated business that is owned by one individual. It is
the simplest form of business organization to start and
maintain. The business has no existence apart from you, the
owner. Its liabilities are your personal liabilities. You
undertake the risks of the business for all assets owned,
whether or not used in the business. You include the income and
expenses of the business on your personal tax return.
More information. For more information on sole proprietorships,
see IRS Publication 334, Tax Guide for Small Business. If you
are a farmer, see IRS Publication 225, Farmer's Tax Guide.
Partnerships. A partnership is the relationship existing
between two or more persons who join to carry on a trade or
business. Each person contributes money, property, labor, or
skill, and expects to share in the profits and losses of the
business.
A partnership must file an annual information return to report
the income, deductions, gains, losses, etc., from its
operations, but it does not pay income tax. Instead, it “passes
through” any profits or losses to its partners. Each partner
includes his or her share of the partnership's items on his or
her tax return.
More information. For more information on partnerships, see IRS
Publication 541, Partnerships.
Corporations. In forming a corporation, prospective
shareholders exchange money, property, or both, for the
corporation's capital stock. A corporation generally takes the
same deductions as a sole proprietorship to figure its taxable
income. A corporation can also take special deductions.
The profit of a corporation is taxed to the corporation when
earned, and then is taxed to the shareholders when distributed
as dividends. However, shareholders cannot deduct any loss of
the corporation.
More information. For more information on corporations, see IRS
Publication 542, Corporations.
S corporations. An eligible domestic corporation can avoid
double taxation (once to the corporation and again to the
shareholders) by electing to be treated as an S corporation.
Generally, an S corporation is exempt from federal income tax
other than tax on certain capital gains and passive income. On
their tax returns, the S corporation's shareholders include
their share of the corporation's separately stated items of
income, deduction, loss, and credit, and their share of
nonseparately stated income or loss.
More information. For more information on S corporations, see
the instructions for Form 2553, Election by a Small Business
Corporation, and Form 1120S, U.S. Income Tax Return for an S
Corporation.
Limited liability company. A limited liability company (LLC) is
an entity formed under state law by filing articles of
organization as an LLC. None of the members of an LLC are
personally liable for its debts. An LLC may be classified for
federal income tax purposes as either a partnership, a
corporation, or an entity disregarded as an entity separate
from its owner by applying the rules in regulations section
301.7701-3. For more information, see the instructions for Form
8832, Entity Classification Election.
December 12, 2008
Back
to Top
Go to Next Article: Obtaining Your Employer
Identification Number
###
Source:
http://www.irs.gov/publications/p583/ar02.html#d0e196
| 
